Kazakh wealth fund, its chief are key to economic progress

December 09. Central Asia Newswire

By Hal Foster

Kazakh wealth fund, its chief are key to economic progressThere’s been a buzz in Kazakhstan recently over the sovereign wealth fund Samruk-Kazyna’s plan to issue shares in some of its companies on the Kazakhstan Stock Exchange.

The exchange is delighted, of course. It has long complained that the London share listings of such powerhouses as Kazakhmys and Eurasian Natural Resources Corporation (ENRC) have hurt its ability to become a bigger player.

Kazakhs interested in investing in some of the country’s top companies also are happy about Samruk-Kazyna’s domestic listing plans. Prime Minister Karim Massimov said the “peoples’ IPOs” will give “the citizens of Kazakhstan as well as pension funds an opportunity to become shareholders.”

The initial-public-offering plans are just a small slice of the activities of Samruk-Kazyna. Its holdings in more than 400 corporations make it the biggest economic force in Kazakhstan and its CEO, Kairat Kelimbetov, arguably the country’s most powerful business person.

Kelimbetov said in a recent interview with international journalists that Samruk-Kazyna chooses to list companies periodically not so much to raise money as to improve corporate governance. All stock exchanges have regulations aimed at ensuring the transparency of listed companies, including requirements for regular reporting of financial results.

London has been major Kazakh companies’ favorite listing site, Kelimbetov said, because of the United States’ Sarbanes-Oxley Act.

American critics of the act contend that its stringent requirements discourage international companies from listing their shares on the New York Stock Exchange. The U.S. Congress passed the act in 2002 after a series of corporate scandals devastated many investors.

Samruk-Kazyna has also been considering listings in Hong Kong, partly because it’s the financial gateway to China. Kelimbetov said he believes Hong Kong investors will be particularly interested in Kazakhstan mining and minerals companies.

Kelimbetov said the recent Organization for Security and Cooperation in Europe (OSCE) summit in Astana helped raise Kazakhstan’s international profile, letting the world know that it is “a reliable partner for global security.”

The head of the British delegation, Deputy Prime Minister Nick Clegg, discussed not only security issues but also business opportunities with President Nursultan Nazarbayev on the sidelines of the summit, Kelimbetov said.

Clegg was the latest in a long list of European leaders who have discussed business with Nazarbayev recently. Two of the most prominent were German Chancellor Angela Merkel and French President Nicolas Sarkozy.

Although not perfect, Kazakhstan’s business climate has improved to the point that North American and European countries have been competing to set up shop here, Kelimbetov said.

The government has streamlined requirements for opening a business. And Kelimbetov noted that the World Bank recently recognized Kazakhstan as the country that had improved the most in its annual “ease of doing business” survey.

Wealth fund chief plays a key role

Not only has Samruk -Kazyna been a key institution in attracting foreign investment to Kazakhstan, but Kelimbetov has played an important personal role, business sources said.

His fluency in English and French, and what international business people have described as his “believability,” have led to his making successful investment pitches in such cities as London and Paris, the sources said.

“Besides having excellent language skills, he’s a very charming fellow,” said an international businessman who asked not to be identified.

In addition to attracting more Western investors, Kazakhstan has also been attracting lots of Chinese companies. And the Chinese have shown their gratitude for the opportunities they’ve received by financing major components of Kazakhstan’s industrialization and infrastructure-building efforts, Kelimbetov said.

China has lent Kazakhstan $13 billion this year, he said, including $10 billion from the Export-Import Bank of China and $3 billion from the China Development Bank.

Recognizing China’s growing importance to Kazakhstan, Samruk-Kazyna recently opened a branch office in Beijing.

Kelimbetov has said that Samruk-Kazyna has three key functions: increasing the value of the companies under its purview by improving their management, helping Kazakhstan diversify its economy away from petroleum and natural resources, and helping the country emerge from the economic crisis.

Samruk-Kazyna has two investment arms to help finance the economic-diversification effort.

Kazyna Capital Management’s aim is to attract institutional investors to economic sectors other than petroleum and mining. The company has six funds, with major investments coming from Kazakhstan, Abu Dhabi, Hong Kong and China.

The Development Bank of Kazakhstan’s objectives are to help finance the creation or expansion of non-natural-resources industries and to finance infrastructure such as roads, rail lines and power stations.

An indication of the key role the Development Bank has played in helping Kazakhstan diversify is the fact that it has pumped $3 billion into processing industries, Kelimbetov has noted.

The government entrusted Samruk-Kazyna with $9 billion of the $10 billion it allocated for economic-stimulus efforts in 2008. The other $1 billion went to the national company KazAgro to be applied to the agricultural sector.

“We were able to pump the money into the economy extremely fast, effectively and transparently,” Kelimbetov said after the distribution.

Wealth fund assists Kazakh banking recovery

The wealth fund’s biggest economic-recovery challenge has been shoring up Kazakhstan’s banking system. Samruk-Kazyna took over three banks in 2009 that ended up having to be restructured – BTA, Alliance and Temirbank. It also took stakes in Kazcommertsbank and Halyk Bank when they appeared shaky.

BTA has been the poster child for Kazakhstan’s banking problems. It wrote off three-fourths of its $16.7 billion in debt when it restructured, stiffing international corporate investors in the United States, Britain, Germany and elsewhere.

That debt included $6 billion in Russia and other countries in the former Soviet Union, Kelimbetov said. Banking sources identified the others as Ukraine and Georgia.

Five billion of the $6-billion debt was in Russia, according to banking sources. And most of the $5 billion will be unrecoverable, largely because of fraud, the sources have said.

Kelimbetov acknowledged in the interview with international journalists that fraud played a major role in BTA’s problems in Russia.

As an example, he pointed to the $1 billion that BTA invested in Moscow’s Eurasia Tower development.

Although he said he didn’t know exactly how much of the $1 billion was used in construction, a guess might be that it was $100 million, with “$900 million moved to offshore banks.” Much of the fraud in BTA’s Russian loans involved money being sent offshore, according to a banking source who asked not to be identified.

Kelimbetov said BTA has gone to court in the United Kingdom to try to recover $2.4 billion. That is presumably money that Kazakh authorities have accused former BTA Chairman Mukhtar Ablyazov and two of his associates of embezzling.

While British courts have rejected Kazakhstan’s request for Ablyazov’s extradition to face criminal charges back home, they are hearing BTA’s civil suits.

Samruk-Kazyna has said it wants to sell BTA, Alliance and Temirbank in the next three or four years. It has been talking with Russia’s Sberbank about taking over BTA, although there has been no indication that a deal is near.

Selling the banks would allow Kelimbetov to spend more time on the government’s priorities of helping Kazakhstan get more return from its petroleum and mineral sectors, diversify its economy and build infrastructure.

International business people and diplomats who are familiar with the Japanese and South Korean economic miracles believe a similar one is under way in Kazakhstan.

If it happens, Kelimbetov will be able to look back one day with the satisfying feeling that he was at the heart of it.

Kazakhstan’s sovereign wealth fund Samruk-Kazyna at a glance:

Role: Samruk-Kazyna’s most important task is managing Kazakhstan’s national companies.

Portfolio: 400 enterprises.

Percentage of ownership: The wealth fund’s share of national companies varies from enterprise to enterprise, ranging from 10 to 20 percent of some companies to 100 percent of others.

Economic impact: The companies that Samruk-Kazyna manages account for 25 percent of Kazakhstan’s gross domestic product.

Tax impact: Samruk-Kazyna is Kazakhstan’s largest taxpayer, generating $3 billion in tax revenue last year.

Major holdings: A handful of companies account for 90 percent of the value of Samruk-Kazyna’s portfolio. They include the petroleum compay KazMunaiGas, the nuclear-energy company KazAtomProm, the mining company Tauken Samruk, the telecommunications company KazakhTelecom, the energy company Samruk-Energo, the electric-transmission network KEGOC, the railway network Kazakhstan Temir Zholy and the airline Air Astana.

Management structure:Three layers. At the top is the board of directors composed of government ministers and international “outside directors,” and chaired by the prime minister. The second layer is the executive board, which includes the Samruk-Kazyna chief executive and two deputies. The third layer consists of the heads of national companies and economic-development agencies.